Green Investment Bank 2.0?

In the three years since its foundation, the Green Investment Bank (GIB) has made waves in the green investment scene in the United Kingdom (UK). But rather than resting on its laurels the UK government needs to realise the work of GIB has not gone far enough, that the level of green investment in the UK is still woefully low, and that the state still needs to play a role in green finance.

In August 2014 I wrote a piece for this blog on the GIB. Established and owned by the UK government, GIB was then the fresh-faced poster child of environmental finance in Britain. The Bank was a bold experiment, set-up to demonstrate the financial viability of green investment.

Already GIB has become an established, successful feature of the green finance scene in the UK. Because of the Bank’s success, a month after the May 2015 election, the new Conservative government announced its decision to sell a majority stake of GIB. For the Conservatives this sale is a natural continuation of the Bank’s commercial model; as the GIB has been shown to work as a model for green investment it now has to go a stage further and prove that it can operate “free from the shackles of state ownership”, to quote Savid Javid, the Minister who announced the sale.

The decision to privatise part of GIB has caused a furore in political and environmental circles (though fears about the future of GIB seem overstated, it is likely to continue to play a solely environmental role). However, with government funding commitments to GIB due to expire in March, the sale seems imminent and unavoidable. Rather than fighting over the ownership of one bank, it is better to focus on the attitudinal influence that the Bank has had. Has GIB really had the ‘demonstration effect’ impact that it was intended to? Have other investors looked to the example set by GIB in the last few years and moved into the field of green investment? Will the UK reach its £200bn green investment target by 2020 (the low end of the £220 – 330 billion needed for a green transition over this decade)? The answers to these questions are important to understanding what should follow the inevitable sale of GIB.

Undoubtedly, GIB has done great work in the brief period since its launch. Through committing £2.1bn in its capital it has contributed to 62 UK green economy projects worth £10.1bn. At a near 1:5 ratio of leveraging private capital and with a 10% projected return on investments, GIB has shown it’s ability to act effectively and demonstrated the potential for green investment.

When I wrote on GIB previously, the Bank was the most active investor in the UK green economy. Upon the publication of their latest financial report this was a position that they still held. Yet GIB alone is not doing enough to reach the investment levels thought necessary to build the green economy. Even under private ownership, GIB’s long-term strategy is to have an investment run-rate of £800m to £1bn a year. Therefore, there will be no astronomical boom in GIB investment levels after privatisation.

GIB recognises that ‘Investment levels in the UK’s green economy remain well below what’s required’. With waves of government green subsidy cuts it seems that little is being done to help promote any increase in those investment levels. Tellingly, the Director General of the Confederation of British Industry spoke out against the government’s record in September of last year saying, “Today’s investors are more uncertain about the UK’s low-carbon future. From the roll-back of renewables to the mixed messages on energy efficiency these changes send a worrying signal about the UK as a place for low-carbon investment”.

That there isn’t another institution rising to threaten the supremacy of GIB shows that to-date the rewards of the bank’s demonstrative mission have yet to be reaped. Other UK investors in the same field don’t have anywhere near the level of capital needed to get the UK closer to the £200bn target. Organisations like the Foresight Group and Oxford Capital Partners, to give just two examples, manage investment portfolios that run into the low hundreds of millions. These are hardly competitors for GIB with its annual running-rate of near £1bn.

The tone of Ministers’ public statements on GIB has been of a ‘good-job, well-done’ nature. There is no recognition that while GIB has in itself been a success it is has barely raised 5% of the 2020 green investment target. Currently, even the conservative £200bn green finance target appears near astronomical. Much more needs to be being done to promote green investment in the UK. Current debates over the sale of one bank seem to be little more than a distraction.

A solution to the current lacklustre situation may well be right before us, albeit one that is unlikely to appeal to more ideological Conservatives. Javid stated in his GIB sale speech that the Bank was a model for “a government successfully involving itself in the markets”. Perhaps the government should follow on from this success, after the sale of GIB, with the creation of second bank for green investment – GIB 2.0. This could introduce a healthy dose of competition for GIB, further demonstrate the sustainability of green investments, and bring the UK that bit closer to its £200bn goal by 2020. Meanwhile the original GIB, privately managed and owned, would continue to demonstrate the viability of green investment.

There is much that can be learnt from the UK government’s first venture into green investment banking. There are notable market gaps at present (though it would unfair to put the blame for these solely on the shoulders of GIB) that a GIB 2.0 could help correct. The unfortunate demise of the Green Deal leading to a serious lack of national energy efficiency efforts is one such case. There are also plenty of other examples of state-supported green finance that lessons can be learnt from. Germany’s state-owned KfW bank, which partly funds sustainability projects through the sale of green bonds, could offer one model under which GIB 2.0 could operate (capital sourcing is an issue which has hindered the GIB since its inception).

Unfortunately, this is an idea that is unlikely to see the light of serious consideration. Fears of the “shackles of state ownership” and of raising the deficit could easily trump green investment shortcomings. Whatever comes next though, the UK government needs to recognise that after the sale of GIB it can’t wash its hands of green investment. Like it or not, the state still has an important role to play in the abatement of climate change and the financing that is needed to achieve this goal.

2 Responses to Green Investment Bank 2.0?

I must say I’d heard of the GIB but I had no idea what it really was or what it was doing, but it sounds like an excellent investment. It seems to me that your argument of starting GIB 2.0 is a strong way forward if there is any chance of meeting our green targets, although if the first effort only raised 5% of the lower end of the target (I’m sure I read that?) then even more needs to be done, and perhaps other private firms encouraged by the state to become involved, but that is certainly a strong start. It’s an interesting read, well done

Thanks for your excellent contribution, Jeremy. I agree that the German KfW bank can be a valuable source of lessons for the UK’s GIB and for energy efficiency financing more generally. Just came across the following UCL Energy Institute report, which expands on this argument: http://sticerd.lse.ac.uk/dps/case/cp/KfWFullReport.pdf

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